Switzerland financial services

Swiss National Bank maintains policy stance

December 28th 2017 | Switzerland | Financial markets and instruments

Event

In its December monetary policy meeting, the Swiss National Bank (SNB, the central bank) left its major policy interest rates unchanged and reiterated its commitment to intervening in foreign-currency markets, as and when necessary.

Analysis

The SNB has kept the interest rate on sight deposits at 0.75% and the target range for the three-month Swiss franc Libor at between 1.25% and 0.25%.

The Swiss franc has depreciated significantly since April. Most of the depreciation was recorded during the summer (June-September) as investors' perception of political risk in the euro area diminished and expectations of a tighter monetary stance from the European Central Bank mounted. The depreciation has prompted the SNB to change its stance on the franc's valuation from "significantly overvalued" to "highly valued". However, even as the continued improvement in global macroeconomic conditions has reduced demand for safe-haven currencies such as the Swiss franc, the currency remains sought after in times of heightened market volatility. Consequently, the SNB's assessment is that the recent devaluation is "fragile", and the central bank remains committed to negative interest rates and intervention in foreign exchange markets.

The SNB raised its inflation forecast for 2017 from 0.4% to 0.5%, and for 2018 from 0.4% to 0.7%, but kept its long-term inflation forecast unchanged. Recent market reports have highlighted that the latter (2.1% in the third quarter of 2020) now exceeds the SNB's target range by 0.1%. However, there is a high degree of uncertainty surrounding long-term inflation forecasts, and we continue to forecast a significantly lower average inflation rate of 1.3% for 2020. Inflation currently remains at the lower end of the target range and, barring a significant change to the global and Swiss macroeconomic environment, we see no reason to expect inflation above the SNB's target.

The improved inflation outlook and recent depreciation of the currency slightly raise the probability of the SNB moving to normalise monetary policy more quickly than expected. Nonetheless, the SNB is likely to keep monetary policy unchanged in the short term, owing to global political risks that could lead to a resurgence of safe-haven demand, derailing the recent increases in both expected and actual inflation.

Impact on the forecast

We maintain our forecast that monetary policy will remain unchanged until 2020. The inflation rate revisions by the SNB are in line with our forecasts for average inflation of 0.5% in 2017 and 0.6% in 2017.